Amazon’s Geek Squad Competitor Is Bad News For Best Buy

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In recent months, Amazon (NASDAQ:AMZN) has made headlines as the company continues to expand its e-commerce retail business across different verticals ranging from transportation & logistics, to grocery stores & physical stores. In an interesting development, Recode reported that Amazon has ventured into the home appliance services space, which could compete with Best Buy‘s (NYSE:BBY) flagship Geek Squad model.

In an earlier note, we analyzed Amazon’s presence in the home improvement and smart home market, and how this recent move could help Amazon gain an even stronger foothold in the space. In this note, we take a look at how Best Buy stands to lose from this development and how much it can be impacted.

See our complete analysis for Amazon | Best Buy

Geek Squad Is A Strong Selling Point
Best Buy bought Geek Squad 15 years ago to provide a technology assistance service, with an in-store, online and 24-hour telephone and emergency online support for its customers. Moreover, customers can avail of a wide range of services including smart home installation, appliance repairs and wearable technology support. Best Buy also allows customers to come in to stores to try out products before buying them. Over the years, the company has expanded its services to enable customers to use Geek Squad services for some products purchased at places other than Best Buy.
Although the company does not report the exact revenue from Geek Squad, a report suggests that roughly 3% of the company’s net sales last year were attributable to Geek Squad. This translates to around $1 billion of sales for the company through this channel. In addition, the presence of consulting and installation services for devices that are difficult to configure or physically install also presumably drives traffic to Best Buy stores.
Geek Squad is a crucial selling point for the company, as its services allow customers to demo products and consult with experts before making big purchases, and provides help with installation and configuration. Best Buy has a significant share in the consumer electronics retail segment, with a market share of about 22%. However, the company has lost share in recent years to online retailers – particularly Amazon. In this decade, Best Buy’s share in the consumer electronics market has fallen from over 25% in 2010 to an estimated 20% by 2016, while Amazon’s share has expanded from around 8% to around 20% by 2016.
As shown below, Best Buy’s total sales have roughly stagnated at around $35 billion over the last few years. In the same period, its share of online sales has increased consistently from 8.5% of net sales in 2013 to over 13% in 2016. This represents a compound annual growth rate of over 13%. Comparatively, Amazon’s electronics and general merchandise segment has grown at a CAGR of over 30%.
How Amazon’s Presence Impacts Best Buy
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Over the last few months, Amazon has hired a team of technology experts to primarily offer Alexa consultation, product implementation and help pair smart home devices. Although this development largely deals with integrating its own intelligent speaker Echo and complementing voice assistant Alexa with other smart home devices, it could severely threaten Best Buy’s Geek Squad service offerings in the long run.

Over the next few years, the consumer electronics market in the U.S. is forecast to grow at 0.5-1.0% through 2022. This means that with limited growth in the total market, retailers will be primarily fighting for existing market share. Best Buy already has a first mover advantage in the services segment, with around 20,000 Geek Squad agents serving tens of millions of customers annually, according to the company’s estimates. So while it will likely take some time for Amazon to even approach those numbers, over the long run Amazon’s ecosystem could attract not only Best Buy’s in-store customers away from retailer, it could also impact Best Buy’s online sales.

We forecast Best Buy’s revenue per square foot in the U.S. to remain in the $900 range through the end of our forecast period. If the total revenue per square foot for Best Buy U.S. retail outlets falls to around $800 by the end of our forecast period, there could be an 8-10% downside to our $50 price estimate for Best Buy’s stock. After Amazon’s interest in smart home services was made public yesterday, Best Buy’s stock price fell by over 6%, wiping out around $1 billion from its market cap. You can modify the interactive chart to gauge the impact a change in Best Buy’s revenue per square foot can have on our price estimate for the company.

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